Tuesday, June 25, 2013

Market/Economic Analysis: Australia

While I've previously been bearish on Australia, my position is now changing to neutral. There are two reasons for this change. First, the ETF has already fallen 20%, which is a bug move for an economy that is still printing decent GDP growth. Second, the LEIs have now printed a positive number for four straight months. This is from the latest Conference Board release:

The Conference Board LEI for Australia increased in April for a fourth
consecutive month, with money supply and stock prices making the largest
positive contributions. Between October 2012 and April 2013, the
leading economic index increased 0.7 percent (about a 1.5 percent annual
rate), up from a decline of 0.4 percent (about a -0.8 percent annual
rate) during the previous six months. Additionally, the strengths among
the leading indicators have remained more widespread than the weaknesses
in recent months.

Here is a copy of the components:

In general, we see a positive contribution from most components over the last 4-5 months with two exceptions: building approvals and the sales to inventory ratio. All other points are doing well. Let's now turn to the CEIs:

Like the LEIs, the CEIs are now printing mostly positive numbers.

Here's the assessment of the economy from the latest meeting minutes of the central bank:

Exports had grown further in the March quarter.
Resources exports, particularly of bulk commodities, had grown strongly
over the past year, while services exports had resumed growth more
recently.

Available information indicated that business investment
had declined in the March quarter. According to the latest ABS capital
expenditure survey, the decline had been in both the mining and
non-mining sectors. The fall in capital imports since the beginning of
the year was consistent with a decline in investment in the first
quarter, although recent data showed that capital imports had bounced
back somewhat in April.
According to the ABS survey of firms' capital
expenditure plans, non-mining investment was expected to show moderate
growth over the next year or so. While the survey also continued to
imply further growth in mining investment, in the past actual annual
capital expenditure by mining companies had often differed by a wide
margin from their forecasts as reflected in the ABS survey. Based on
public statements by mining companies and information from the Bank's
liaison, it seemed likely that mining investment was near its peak but
would probably remain at a high level for the next year or so. However,
members observed that there was considerable uncertainty about mining
investment beyond that period. In particular, changes in production and
exports of energy commodities in other countries were making it more
difficult to assess the potential for new projects in the gas sector in
Australia. Overall, conditions in the business sector remained
somewhat subdued, with survey measures for all industries at, or below,
average levels.
Household spending appeared to have picked up early in
2013, after having slowed late in 2012 and having been supported by
higher asset prices. In the March quarter, growth of retail sales
volumes was strong across most categories, amid a decline in retail
prices. Liaison suggested that the pace of retail spending might have
eased somewhat more recently, while measures of consumer confidence
fell back to around average levels in May.
Members observed that the effects of low interest rates
had been evident in a range of housing market indicators. Building
approvals for both higher-density and detached dwellings had increased
over recent months. The Bank's liaison contacts were generally becoming
more positive about the outlook for dwelling investment. Also, loan
approvals had grown more strongly in recent months, including for new
housing, and auction clearance rates were well above average in Sydney
and had picked up to be a bit above average in Melbourne. While
measures of dwelling prices had been relatively flat over recent
months, they were still higher than the previous year.
Labour market conditions remained somewhat subdued. The
monthly employment data continued to be volatile, with a large increase
in employment in April following a sizeable decrease in March. Looking
through this volatility, employment growth had not been as fast as
growth of the labour force, which had led to the unemployment rate
drifting higher over the past year, to 5½ per cent. Job advertisements
had stabilised earlier in the year, but had edged down in recent
months. Overall, leading indicators of employment pointed to continued
moderate employment growth.
The wage price index had increased by 0.7 per cent in
the March quarter, a little less than had been expected, and year-ended
wage growth was below the average of the past decade. The easing in
wage growth had been broad based across industries and states, with
notable declines in areas related to the mining sector. While the
decline in the pace of wage growth in recent quarters had been most
pronounced in the private sector, growth in public sector wages
continued to slow in the March quarter and remained relatively subdued,
consistent with ongoing fiscal restraint.

What we see in general is a business sector split between natural resource and non-natural resource sectors. The former is in flux as a result of the Chinese re-balancing, while the latter is OK. Consumers are still spending thanks to the wealth effect of higher asset prices. The Central Bank also has room to lower rates further if needed.

Let's turn to a few Australian ETFs, starting with the equity markets.

Prices have dropped almost 20%, from their high of 28.15 to yesterday's close of 22.60/ Prices are now below the 200 day EMA; they've brought the shorter EMAs with them. Also note the slight increase in volume and negative MACD and CMF. Prices are right at the 38.2% Fib reading from the June-May rally.

Like the equity markets, the Aussie dollar has also dropped sharply, falling about 12.66%. Like the equity market, the technicals are very negative. However, prices have made a 100% retracement from their May move last year, indicating this might be the end of the sell-off.